Insight

SPAC insights: Forecasting the future

Why you want to build financial projections capabilities early

Prashanth Brindavan

Prashanth Brindavan

Principal, Advisory Finance Transformation, KPMG LLP

+1 949-885-5437

Nausheer Allibhoy

Nausheer Allibhoy

Managing Director, Valuation & Business Modeling Services, KPMG US

+1 213-955-8998

Once your company goes public via a SPAC merger, investors will expect regular—and accurate—business updates. Producing credible forward-looking statements depends on having trust in your data that can be leveraged for analytic and forecasting capabilities. But building out this structure with the right processes, systems, and talent will take time. To be ready on Day One, companies will need to commence work well before the deal close date.

Why you want to build forecasting capabilities early

SPAC deals proceed much faster than initial public offerings (IPOs). Once a company is public, the market expectations around providing good forecasts and views into the future will be the same irrespective of how long companies took to become public. If investors are unsatisfied or don’t believe the numbers, your stock price could take a hit.

Another difference between SPAC deals and IPOs is that a company being acquired by a SPAC often includes financial projections in documents filed with the Securities and Exchange Commission (SEC) to attract investors based on its growth potential even if no immediate profits are on the horizon. This, however, can open the SPAC combination to litigation risk if investors challenge the forecasts.1 For this very reason, IPO companies typically don’t provide financial projections in documents related to their share offerings.

Potential litigation and investor flight are two external reasons for SPAC target companies to ensure solid financial planning and analysis (FP&A) capabilities. Yet, in the rush to complete the SPAC transaction, many companies may feel they don’t have the bandwidth or resources to set up a proper FP&A function. This is a delicate balancing act for the parties in a SPAC deal, but delaying it could lead to bigger problems down the road. It’s better to build robust forecasting capabilities sooner rather than later.

How to build forecasting capabilities

The complexity of today’s business environment often requires extensive financial modeling based on data-driven techniques. When building these forecasting capabilities, it is important to address the structural and talent issues holistically. The structural elements should allow the embedding of the business context, integrated planning, and robust reporting and analytics capabilities, while the talent elements should encompass performance expectations, appropriate competencies, and effectiveness of business partnering.

Step 1: Begin with a holistic view of financial forecasting

Target operating model

Service delivery model

People

Process

Supporting technology

Data and reporting

Governance


Structural elements

Business
context

Understanding the industry, the organization’s strategy, value drivers, and the “fit of finance”
 

Integrated
planning

Aligning the technology and tools to business requirements. Enabling an efficient commitments and accountabilities cycle

Reporting and
analytics

Analyzing the performance to drive value creation and a more performance-centric organization

 

Talent elements

Performance expectations

Understanding and articulating what business partnering expectations the business has of Finance
 

Competency

Defining, acquiring and/or developing the skills, capabilities and behaviors required to deliver highvalue business partnering

Effectiveness
 

Measuring the impact business partners have on business performance. Driving the right behaviors
 


Then, in the build-out process, SPAC companies may want to consider the gaps in traditional FP&A, such as the lack of integration and emphasis on historical analysis, and leverage technology and data analytics to transform it to business planning and analysis.

Step 2. Transform traditional FP&A to business planning and decision support

FP&A: Today How? Business planning and decision support: The future

Financial

  • Finance focused
  • Lacks integration
  • Disconnected from business
Integrate business processes, technology, and people

Business

  • Business focused
  • Integrated partners, process, and technology
  • Collaborative business partnering

Planning

  • Detailed labor-intensive planning process
  • Focused around the budget
  • Elongated cycle times
Plan with drivers; implement rolling forecasts; leverage new operating models and technology, artificial intelligence, cognitive, cloud

Planning

  • High-level planning, less tactical
  • Forward-focused forecasts
  • Efficient cycle times

Analysis

  • Historical focus
  • Standard analysis reports
  • Inefficient delivery methods
Refocus data and analytics toward customer and product dimensions Analysis
  • Drive business value
  • Eliminate and automate
  • Drive new analysis outside of standard


Many companies utilize external specialists to supplement the internal FP&A function. This can help the company maintain and meet the strict deadlines associated with a SPAC deal. In some cases, this takes the form of thirdparty validation of the company management’s financial forecasts. Advantages of this approach include: unbiased verification of the key drivers, inputs, and assumptions underpinning the financial model; incorporating an external review of the company’s business drivers, KPIs, and outlook prior to presenting it to external stakeholders; and ensuring that the financial projections can stand up to the rigorous scrutiny of the investors and the SEC. The only downside associated with obtaining a third-party validation of the financial forecast is the additional time and cost.

Bottom line


Getting forecasting right or wrong could make or break your company after a SPAC merger. It’s best to get an early start to put all the necessary pieces in place so that you can consistently produce accurate and credible projections. But if you can only do the minimum before Day One, getting third-party validation for your internal forecasting processes is very important.


Footnotes

  1. Source: Fenwick, “Financial Projections in SPAC Transactions: Mitigating Class Action Litigation Risk,” October 12, 2020